During the past two months we’ve had two significant and unexpected outflows of cash. These experiences have reaffirmed many things for me. First, a rainy day savings account is inestimably valuable and comforting. Second, initial bids from contractors and laborers are always high; don’t get suckered in. When it comes to negotiating with sales representatives — foster boldness, dash fears.
Our first unexpected outlay of cash occurred when a swarm of black, winged insects came pouring out of the wall by our back door. Termites. The first bid we got for treatment from Terminix came in at just under $1400. I’d been warned that extermination would be pricey, but that estimate knocked the wind out of me. By the time the Terminix man was walking out my front door, he had already lowered his estimate to about $1000, simply because I’d asked, “Now is that bid the lowest you’ll do this treatment for?” Satisfied with the $300 concession and horrified by the infestation of wood-eating-insects, I just wanted to sign the paperwork and get some poison pumped around our foundation ASAP.
However, at the insistence of my husband, I made three phone calls to different extermination outfits, and by the time I was done, we had our bid down to $849. With another couple of phone calls, pitting pest-control providers against each other, we had the bid down to $649 plus tax. We paid $703 (total) for the termite treatment. In other words, we kept six hundred dollars in our pockets just for making a few phone calls and holding a few salesmens’ feet to the fire. And we haven’t seen a single sugar ant, let alone a termite, since the service.
The second unexpected outlay of cash happened just last week when we took our car in for a ninety thousand mile inspection and discovered that we needed some extensive work done on our brakes. The first bid we got from the mechanic was almost two hundred dollars higher than what we ended up paying for the work we had done (by the same mechanic who gave us the initial bid.) The principle of dickering for deals is one I’m learning by repetition. And I’m saving our family hundreds of dollars in the process.
Here are a few take home points for negotiating with vendors:
Remember that initial bids are rarely (if ever) the bottom line. My husband and I both learned from personal sales experience that the initial quote you offer a customer is always high. The sad reality is that most people will willingly take that first quote sans questions. Don’t be one of those customers.
Don’t be afraid to make the situation slightly uncomfortable with a follow-up like: “This bid seems pretty high to me; is this the best you can do?”
Be upfront with the representative about the fact that you will be calling around to other service providers to compare cost. A lot of times an establishment will want your business badly enough to lower the bid right then, without any competing bids. Especially now with the economy in low gear, many vendors are willing to relax and play nice from the get-go.
Follow through with the threat to call around. Cost compare. And if it’s prudent, take your business elsewhere. Talk to friends and trusted associates about reputable establishments you can contact for alternate bids and start pitting providers against each other.
Almost everything is negotiable; dicker over the price of monthly cell phone rates, pest-control fees, utility rates (especially phone, internet and cable costs,) insurance premiums, car repair quotes, household repairs, etc.
And finally, keep the money you save stashed safely away in your emergency/rainy day fund; life has proven time and time again that you can always expect quite a bit of the unexpected. And whether it’s medical expenses or termite infestation, the resolution of the unexpecteds usually requires money.
If you have read my bio you know that I do several things for my clients. I help them with financial planning, investing, insurance and taxes. All of these things can have a lasting effect on their future as well as on the things and the people that they will eventually leave behind. So, when I have a couple come into my office, what single item holds the greatest importance in my eyes? If the couple is married, and especially if there are minor children in the family, nothing is more important to me than if they have a last will and testament – a will.
Last year I learned of a tragic scenario playing out in the family of a client. A married couple died in a car accident, without a will in place. The respective families then went to court to battle over who would care for the children. The battle became fairly bitter. In the end the judge over the case determined that the feelings and actions of the two families were so negative that it wasn’t a good situation for the children to be in – so he made them wards of the state and put them in foster care! The thought of that happening to children crushes me. There were two families who loved these children and would have cared for them and instead these children will grow up in multiple foster homes, separated from each other and subjected to who knows what. All of this happened because their parents didn’t take the time (an hour or two) to create a will.
Now, I know that this may seem to be an extreme example. However, it is extremely common for families to have bitter disputes over children, personal possessions and money. In this business I have the opportunity to witness first hand what happens to families when even a little money comes in to play. Based on my experience and the experience of others I know, I would say that it is the exception when there are not hard feelings that come out between family members when these kinds of decisions have to be made – especially under the added stress of having lost a love one. I know of way too many people who no longer speak to a family member because of such disputes. If you have anyone who depends on you or if you have any love or concern for those you leave behind there is no excuse not to do them the service of knowing your wishes in these regards.
With that in mind, would it surprise you to know that I have sent clients home to get a will and asked them not to come back until it is done? These are clients who are working with me to complete full financial plans and who have their assets invested under my care. Often they have many things to do in order to achieve their goals and fulfill their financial plans. However, if we have talked about a will previously and they come back for a subsequent appointment without having completed one I have been known to do nothing else with them until it is done. As a side note, or an underscore to how important I feel this is, I want to remind you that I do not get paid when my client gets a will. So there is no ulterior motive here.
There are a couple ways. The first is to find a competent and respected attorney. This is a costly route, but if the attorney is well-versed in the estate laws in your state it can be the most sure way of knowing that your wishes will be honored in a court of law (and not easily challenged by those who want to change it).
A second way is to get a will on-line. There are several sites out there that provide this service, often for a small fraction of the cost of an attorney. You will find many arguments for and against using such a service. I do not claim to be competent enough in this area to know for sure which is best. You must do the work at this point and determine what you feel best about and then move forward.
One thing I am confident about, though, is that you need a will and if there is no way that you are going to be able to afford an attorney then by all means please at least use one of these sites. The prices that I have seen run between $60 and $140. At least in this way there will be documentation of what your desires were.
Now, go home and get a will and don’t come back to this site until you have!
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
Today is Porter’s 4th Birthday. For two years he’s asked me why I have to go to work. For two years I’ve told him the same thing:
To earn money, so we can buy food and have a place to live.
When he was really little he actually started to leave money out of the picture. I’d say I’m going to work and he’d respond, “to buy food?” And that, my friends, is how the world works. His first exposure to money and he just forgot about it. Food was the important part.
Last year for Christmas he was given a wallet with a five-dollar bill inside. I was amazed, but he actually kept that money in his wallet for the most part. A few times I found it among the toys in their toy box and I’d bring it to him and tell him how important it was that he keep track of his money (you can’t start ‘em too early). His aunt came and visited a few months ago and we headed off to Target because Porter had decided to assign those five dollars a job: buy a toy light saber.
Julie and I went off to do some other Target-errands while Porter and his aunt headed to the toy section. When it came time to checkout I was keenly aware of the entire process. This was his first transaction and I wanted it to hurt when he spent that five dollars. (The total was actually $7.50 and I made up the difference – a moment of weakness perhaps).
I made sure Porter handed the cashier the five dollars, and waited with baited breath to see his signs of hesitation, perhaps a furrowed brow and a longing look at his wilted piece of currency.
Nope. He handed it to her so fast and didn’t blink an eye. Money was a means to an end (end = light saber).
I used my new found knowledge a few weeks later when I came home from gathering food and was told that the basement apartment below us was now dealing with a broken window, compliments of Porter’s (awesome) ability to huck anything he can heft further than kids twice his age.
I didn’t so much care about the broken window, or even really about the money it would cost. I did want to teach Porter a lesson about what this loss would mean. I sat him down and told him that because it was going to cost money to replace the window, we wouldn’t be able to buy a Wii. His eyes got big and he got the lesson. The Mecham Pie is finite buddy, and you just ate a slice.
[We still haven't purchased a Wii even though I still really want one for, you know, Dad-Son bonding time and things like that. Porter still mentions the fact that we don't have a Wii because he broke the window. The lesson that just keeps on teaching!]
For Porter, the End was the Wii and we didn’t have the Means because he had broken a window.
As an adult with these little dependents running all around me, my Ends are different. Or at least they should be. And I suppose that is where the lesson lies.
This list is not exclusive, but as an adult, your Ends should include:
An Emergency Fund – Guys, give your wife a break and let her have a bit of breathing room! She’ll thank you for it.
Savings for Retirement – Don’t depend on anyone for your retirement except your own ingenuity, creativity, and sweat.
Minimal (or no) Debt Load – Pay off all of your debt as fast as you can and reclaim all of the time, sweat, thought, stress, and tears that create that precious income.
A kid gets bright-eyed with the prospect of spending $5 on a light saber. A guy gets bright-eyed with the prospect of spending $500 on a “modest” gas grill (the one that really caught my eye yesterday was over $900 though – yeah right!). Does the same guy get excited about throwing $500 toward unsecured debt? Or stashing $300 in his emergency fund?
At some point, the earlier the better, your Ends have to change. You’re no longer a kid. For Porter, Money equals things. For you, an adult, Money should equal Security and Peace.
Emily’s article on Frugal Summer Fun was included in this week’s Festival of Frugality, and my focus on the Means side of Living Within Your Means was included in this week’s Carnival of Personal Finance.
I have heard a lot of frenzied comments and illogical notions regarding home equity lines of credit in the last two weeks. The news media have been reporting, correctly, that many banks are beginning to freeze equity lines and not allow people to take out any more credit. Along with that, many are suggesting that you should take out everything you can get in your credit line before they freeze yours too. Please, think before acting when it comes to this decision!
Over the past few months, because of the credit crunch, some homeowners have been receiving letters from their banks indicating that their home equity lines of credit are frozen – meaning they cannot get any more money. The letter may say that it is because of declining values of homes in the area, or for many other reasons. Sometimes it may be for no reason at all, other than the bank wanting to decrease its exposure to the current markets. Don’t be offended or let pride get the best of you! This may not be a terrible thing. Case in Point:
I was at a meeting of local business owners this week. As we were discussing various things one of them said that he had received such a letter. The bank told him that his home (which he then described in detail and said had been appraised three years ago at $1,000,000) was now only worth $450,000 and so they were not able to extend him any additional credit and had frozen his equity line. He was upset and paid $400 to an appraiser to prove to the bank that his home was worth much more. The appraiser said that it was worth $625,000. Did the bank budge? No. And now he is $400 poorer.
First, remember that this isn’t your money that they are freezing. They just aren’t giving you any more of their money. I have read articles in some very respectable publications urging people to take out the remainder of their credit line in a lump sum so that they have it when they need it. To me this is ludicrous. Yes, there are potential tax advantages to this kind of loan. Yes, the interest rates on these loans are often lower than many credit cards. But you are still paying interest. And, by definition, any tax benefits will only be a percentage of that interest that you pay. The real question is, do you really need the money?
If you are in real need of a loan and the best way for you to get it is through your equity line, then you may want to take some out now while it is still available. But please don’t increase your debt “just in case.” Would you spend $10,000 on your credit card just to have an extra $10k in your savings account? I hope not. In many ways, jumping on this frenzied equity-line-band-wagon is just the same.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
Your mileage may vary.
I was trained in accounting and, though I don’t do much accounting these days (I can still hold my own with some pretty sweet tax strategy), all of the ideas are still very much a part of me: double-entry bookkeeping, accruals, deferred revenue…blah blah blah.
One takeaway I got from some 150 credit hours of accounting? Keep things simple. Should there really be any other way?
One Checking Account
We have one checking account. Julie has a debit card and I have a debit card. The debit card is used at Costco and for a few places that don’t take a credit card (health insurance and electricity). We also write a few checks a month (rent, tithing, babysitting -> worth every penny, etc.). There’s very little volume in our checking account. Looking at it right now, 2/3 through the month, there are 12 transactions.
Whenever we earn money, it always hits the checking account. The checking account is the gatekeeper. To get in, you go through there.
One Credit Card Account
The credit card gets quite a bit more volume. We run everything we can through there and enjoy the measly cashback of 1%. Right now, on the 21st of June, there are 29 transactions in there. I just saw four in a row from Target, all on the same day.
JULIE?!!?
Just kidding. I’m sure she has a very reasonable explanation. And I’m sure we budgeted for it (right?).
These two accounts are the only ones I actually track in YNAB. The checking account and credit card are both at the same bank (alright, it’s Wells Fargo okay? I love the stagecoach so much.) I’m sure there are credit cards with better cashback and all of that, but I thoroughly enjoy having the same bank handle both — payments (in full) on the credit card from the checking account are instant. We have several more savings accounts that I’ll get to in a second.
Car Replacement Fund
Each month we budget $75 into our Car Replacement category. Our savings account is set up to automatically transfer the $75 from checking. Yes, we realize that $75 is terribly low when you’re saving for a BMW Hard-Top Convertible, but it’ll have to do and no, I’m not giving up the dream.
How does it work in YNAB? I just plug $75 into the Budgeted cell of the Transportation : Car Replacement category and let the balance accrue. At the time of this writing, we have $1,315.14 in there. Last year we made $23.28 in interest. This year so far it’s at $14 (interest rates have dropped).
Yes, because of that interest, what my balance shows in the Car Replacement category is not the actual bank balance. I don’t really care at the moment. I’ll do a true-up when we actually buy the Beamer (in about 30 years at our rate). When we do buy the Beamer, I’ll transfer the money from our savings back to checking, record an uncategorized inflow into the checking account for the interest, record the transfer of money, and budget a negative $40,000 in the Car Replacement fund to make it Available. I’ll then spend all of that money on a piece of well-engineered metal.
House Downpayment Fund
We also socked money away into this account for some five-odd years. Pleased to report that we are now first-time homeowners (as of yesterday), not just first-time homebuyers or, before that, first-time homebrowsers.
I transferred all the money in that account to checking and wired that money to the title company. None of this has been entered into the budget yet, because it’s not Sunday (I’ll get to that).
Julie’s Fun Money
Julie has so much fun money saved, it actually seemed worthwhile to have her open her own savings account to earn interest and shortly retire. That money just sits there, taunting me. She never spends it.
Jesse’s Fun Money
This account is much smaller, but that’s only because last year I bought a practice putting green for the office, a set of clubs, and innumerable driving range buckets. There’s just enough in there to pick up some hybrids, which will take my game to the next (low) level. Oh, and last year I took up golf. Thanks to Mom and Dad for the graduation present, which fully-funded this quickly-dwindling account.
Emergency Fund
You got it. There for emergencies only. We’re working on getting it to six months’ expenses. It’s taking F-O-R-E-V-E-R. (As an aside, we’re also starting to stock up on food, bullets, and gold bouillon — a necessary component of any TEOTWAWKI plan).
Float
A little over two years ago I started playing the float by taking our average expenses and having that amount automatically sucked into this online savings account right after we paid our credit card off. It would then automatically be spit back out of this account into our checking just before we paid the credit card again. All in all, it meant that money was sitting there for about 23 days per month. We now have in this account $130.63 (approximately).
I stopped playing the float early this year because recording the transactions in the checking account of YNAB was starting to annoy me.
I also believe that since I came up with the scheme that the $130.63 should be transferred to Jesse’s Fun Money. We’re yet to reach consensus. Until we do, I guess that money will just sit there earning piles and piles of interest (at 2.75%).
(We could play the float because we charge virtually everything on a credit card – not to mention having the Buffer)
Like I mentioned above, the only accounts that are in YNAB are the checking and credit card accounts. All of these other accounts have such a low volume that it wouldn’t add much value to track and reconcile them to the same level that we do the Big Two.
Each of these savings accounts I listed is simply a budget category in YNAB. When we physically move money into any of those accounts then we record a category-less outflow from Checking and make sure we input the budgeted number. The balances accumulate sans interest and everyone’s happy.
If I have cash in my wallet it’s officially off-radar (Oh What a Beautiful Feeling!). We record outflows in the budget when the withdrawal happens and that’s the end of that.
Why is my budget-centric mind comfortable with this? Because we withdraw very little cash — somewhere in the neighborhood of less than 1/2 of one percent of our spending is with cash. Increase that number to somewhere around five percent and the story would change.
I think sometimes Julie extorts money by buying something with the credit card, then returning it and getting cash back. How else does she ever manage to not spend her Fun Money? I see a charge on our card, inquire…and she just says, “Oh I took that back.”
“And they gave you cash for it? Dearest?” I lovingly ask.
“Yep” replies the normally very-talkative Julie.
Wise men simply leave it at that. And so do I.
Back before we could import bank transactions, this was a nightly affair. Also, back then we were learning a lot more about spending and awareness and it was important that the frequency be pretty high.
Now, things are so much better. We feel “in the groove” with spending so to speak. We update the budget every Sunday evening. On the first (or last) Sunday of the month we’ll sit down and have our Budget Meeting (Emily wrote a great piece on that a bit ago). We’re usually done in about 15 minutes.
Our budget categories are basically what you see as the default when you start a new Budget. I think that’s far too many (we’ll be changing it). Lately I’ve been working on consolidating categories as much as possible. In my ideal world, I think I would have a Walmart category so I didn’t have to do receipt splitting (it’s the only store that requires splitting for us!). I’d also consolidate all of the insurance premiums into one category (health, life, auto, home). Those are just a few ideas though.
Fewer categories, as a rule I think, is better because it means less thinking, typing, and checking.
However, if you’re really trying to apply some downward pressure on your spending, more categories means more granularity, which means more awareness, which means less spending. You’re the only one really qualified to decide.
I didn’t mention retirement accounts or things like that. It’s getting kind of nuts on us again and I don’t like it. We have 529 plans for the three kids, one from each parent, so that’s six plans in all (bleh). It’s some goofy Utah thing I guess where the parents can’t combine their allowable deposits into one account. We have a Roth for me and a Roth for Julie. We started a SEP-IRA last year, funded that, and now aren’t using it anymore because I moved to a Solo 401(k) (should’ve done my homework earlier and never done the SEP in the first place).
We also have a few single stocks (AAPL, GE, COP and SVN if you’re at all interested). SVN was delisted, demoted to the pink slips. That’s how good of a stock picker I am. I bought AAPL back in 2005 because I kept seeing more of their laptops (one of which is sitting atop my lap) on the university campus. Wish I would have bought more. I bought GE because Fortune told me to and man were they wrong. I bought COP because I wanted to feel slightly happy when gas prices go up (the happiness doesn’t offset the sadness however). Wish I would have bought more. Oh and yeah, Fortune told me to buy SVN as well.
I’ve been clean with single-stock buying for a year now. Don’t know when I’ll sell.
How do we handle these investments with YNAB? They’re all just outflows in their respective categories. Why? I’ve purchased a mutual fund, a stock, or a bond with our cash — just like I purchase milk. The only difference is that when I sell, I’ll record an inflow again. Budget-wise, retirement is pretty darn straightforward.
Hopefully this helps someone out a bit. Just try and keep your finances simple. Don’t get all crazy and have quarters falling out of your pockets while you’re chasing dimes, so to speak. If you’re just starting to really “manage” your money, then you’ll need to be more involved with it and update your budget more frequently. That will naturally bring your spending down and increase your awareness. And you’ll start winning.
Real Estate can be an important and often successful part of a wealth-building strategy. For this reason, many people buy investment property. However, a major barrier to entering the Real Estate market for many people is a lack of money available for a down payment. Even those who have done a great job saving for their retirement often have most of their savings tied up in accounts that are penalized if the money is withdrawn before age 59 1/2. What most people don’t realize is that the money in a retirement account such as an IRA or an old 401(k) can be used to buy Real Estate or other non-traditional investments. With a self-directed IRA, these funds can be used to make such an investment.
All retirement accounts are maintained in the name of a custodian. A custodian exists, in part, to assure the IRS that you have not tapped into your accounts during the year (thus triggering taxes and potential penalties). In addition, these custodians often assume a level of fiduciary responsibility. As a fiduciary they limit the investments that you can choose from so that they are not held liable for allowing you to invest in something “crazy.” Such custodians will not allow use of a retirement account to invest in Real Estate.
However, a few custodians offer what is called a self-directed IRA. In this case the custodian withdraws its fiduciary responsibility and allows you to choose the investments that you think are appropriate. With this option, you can take the money that is in your IRA, or that is in a 401(k) from a previous employer, and use those funds to purchase investment property, precious metals, or even a new business. The ability to use these funds in such a way allows for significant risks to your investment, but also offers two great benefits that would not otherwise be available.
The first benefit is probably obvious from what has been said so far. You are able to invest the money in your retirement savings account in almost any way that you feel is best. You can choose the investment that you think will bring the greatest success in preparing for your future needs and you have a source of money for such investments that you may not have realized was available to you.
The second benefit may be quite as obvious. This benefit comes at tax time. Since the property is held within an IRA, all income and gains are tax deferred. No longer do you have to pay taxes each year on the rental income, but can defer that income to a future time. You can keep the income within the IRA account and reinvest it elsewhere, or have it in reserve for future expenses. Even more exciting is that if you decide to sell the property and buy another, or even if you just keep the gains and invest in something else, it isn’t necessary to deal with the headaches of a 1031 exchange. Timing of sales and purchases can thus be made when they are optimal instead of being forced to buy something within the strict 1031 guidelines in order to avoid the taxes.
Of course, you must use great prudence and caution when investing your retirement savings. You should not, for example, “put all of you eggs in one basket” by using all of your money to buy one property. You must also be aware of the many risks that are inherent in Real Estate, including a measure of illiquidity.
Additionally, you must remember that the IRA owns the property. Should you need to make repairs or replace the roof that money needs to come from the IRA. Otherwise, if you pay for anything out of pocket, it is considered a contribution to your IRA (subject to all of the limitations of an IRA). Therefore it would be wise to have a significant portion of your IRA money in reserve (not invested in the property) so that you are free to make adjustments as needed.
You also need to be aware of some special rules. For example, you must use an independent property manager to receive the income and pay the expenses. Remember, the IRS doesn’t want you to touch the money in your IRA, and in this situation any money involved in the investment would count. The property manager would collect income and send it to the IRA custodian would bill the custodian for expenses. The custodian will also charge a fee for this service. You still have control over the property manager; you just can’t touch the money. The rules for owning a business within an IRA become even more complicated. With any such investment you must be sure that you first completely understand how it works.
The tax benefits of this type of investment can be enormous. The ability to tap into retirement funds to make a great investment can be wonderful. But the decision to make such investments through a self-directed IRA should be made with the help of competent professionals, in order to avoid serious pitfalls. With that said, a self-directed IRA is a lesser-known option that can be a great asset in your strategy for financial independence and tax-benefited investments.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
I’m new to the blog, but not new to YNAB. I’m proud to be the lead programmer behind YNAB Pro.
But let me start at the beginning. A couple of years ago, I was looking for a better budget program, and when I found YNAB I knew I’d found a good thing. Jesse and I started talking, and in short order we discovered that we were both excited about the idea of YNAB evolving into more than a spreadsheet. A few months later we released YNAB Pro (to great acclaim).
Since then, we’ve always been trying to improve YNAB Pro, and I’m proud of how far it’s come. Our forums are probably the most helpful place on the internet! If you haven’t before, I encourage you to read through them. There’s nary a question unanswered, and that even includes the ones that leave Jesse and I scratching our heads! I honestly don’t think you can find a friendlier group of folks anywhere. In addition to helping each other, our customers really help us too. When they share their ideas (and yes, even their frustrations), it helps Jesse and I to know what to focus on for our next release. Up until now, there’s only been one problem: time.
What some people might not know is that YNAB Pro has been a side-project for me for the past couple of years – not a full time gig. (For my day job I was a programmer for a big video game publisher.) I’m proud of what we’ve accomplished in this time, but I have always wanted to accomplish things faster. When you know it will just take a few minutes to add a feature that will save thousands of people hours of time managing their money, you want it done yesterday!
I’m excited to announce that as of a few days ago, I began working on YNAB Pro full time. I get to work with Jesse on budget software all day long, which means more frequent releases of YNAB Pro, which makes for a happy lead programmer and even happier budgeters.
I’ve already begun working on the next release. I’m fixing lots of little annoyances, like allowing you to easily change the order of the account tabs so that people don’t have to do silly things anymore, and making it easier to import bank transactions. I’m also going to be adding official transfer functionality. I’m excited about it. Have something you’d like to see get added to YNAB Pro soon? Please let us know!
P.S. For those of you scratching your head at the title of this post, that’s how we say “Hi” down here in Austin, Texas.
We are about a year and a half removed from our first home buying experience. Reflecting on the purchasing process through the clarity of hindsight, I’ve compiled a bit of amassed wisdom I’d share with other first-time buyers:
Slow Down. There will always be great houses, with great yards, in great neighborhoods on the market. And there will always be good deals. Abandon the scarcity mentality, especially in the present market that is, and will continue to be, plump with anxious sellers. Wait not just for a good opportunity, but for the right opportunity.
Don’t fall for the “rent = throwing away your money” myth. Renting is not throwing away your money — it is exchanging your money for a roof over your head. And, depending on your circumstance, the flexibility that comes with renting can be extremely valuable. Also remember that much of the money that is lumped into the term “mortgage payment” is essentially rent. Consider how much goes to taxes, interest and insurance, and you’ll realize that there is, in fact, just a small portion of what you send away each month that translates into actual equity.
Keep an intensely accurate budget for several months preceding the purchase of your home (especially your first home.) Be familiar with utility rates, maintenance/repair fees, and fixed expenses so that you know exactly how much you can comfortably afford to allocate for a mortgage payment each month. In addition, carefully consider the increased expenses that often come with ownership (new appliances, yard maintenance and equipment, higher utility bills if you’re moving to a larger residence, increased fuel costs if you’re moving farther from work, etc.) Familiarize yourself with all the financial implications of ownership and make sure you still have a cushion to absorb the shock of unanticipated home maintenance or just the rising cost of daily living that so often takes us by surprise. The flood of foreclosures on the market at present is evidence of the fact that many recent buyers were overly optimistic about what they could afford.
Don’t get emotionally attached. I know. Easier said than done, right? But if there is one thing that will help you make a more astute financial decision with regards to the purchase of your home, it is this principle. Be willing to walk away from a seller who won’t negotiate into your price range. Understand your “Best Alternative to no Agreement,” (that you will be able to find another suitable residence,) and be willing to walk away from a deal that is not right. Don’t make emotional concessions (i.e. I love this house SO much that I’d be willing to spend a little less on food every month and buy less clothing to be able to live here,) that will stretch you beyond your predetermined price range. A house will not sate your desires and fill your happiness quotient like you might imagine. The granite and stainless will lose their luster remarkably quickly if you’re stretched to (or beyond) your financial limits month after month to afford them.
Buy with your values in mind. Be thorough and thoughtful in establishing your criteria for a home before you start looking. Consider things like commute distance, yard size, proximity to shopping, schools, parks, etc., and let your predetermined values guide your search and ultimately your purchase.
Finally, when trying to nail down the right mortgage, remember these things:
Money is a commodity. You are trying to find the lending establishment that will get you the most affordable money (i.e. money with the lowest interest rate and closing costs.) Approach the process with that kind of objectivity in mind.
Get five ballpark estimates from mortgage brokers based on a set of realistic assumptions about your financial situation.
Go back to the most competitive three ballpark estimates and ask for a “good faith estimate” based on your credit score and down payment capacity. It’s generally poor policy to come in much over a good-faith estimate, so these figures should give you fairly accurate ideas about rates and closing costs on a mortgage.
Take the best of the three good faith estimates to the other two bidders and see if they’ll come down from their original quotes. Let the mortgage establishments bid each other down; find out how badly they want your business.
Avoid interest only and adjustable rate mortgages. Beware of prepayment penalties and other fine print that often accompanies sub-prime loans. It is generally best to wait until you can afford a fixed rate, traditional mortgage.
We received almost all of this advice in some form or another prior to our home purchase; we gave strict heed to some suggestions and not so much to others. We’re happy in our home and comfortable in our mortgage and still, in hindsight, I wish we’d let all of these principles guide all of the decisions that affected such a substantial budget and life-altering commitment.
Occasionally someone will need some extra attention in getting started with the YNAB system and we’ll work with them through either YNAB Coaching, the forums, or sometimes just with a few quick emails.
90% of the time the ranting is something like:
I’ve written extensively when it comes to living within your means. For the most part, when it’s mentioned, people think one way:
Living within your means.
When perhaps they should be thinking another way:
Living within your means.
I’d like us to start thinking about the more enjoyable part of this platitude. Would you rather figure out a way to save $50, or make $50? And then the next obvious question is of course, “Why not do both?”
Too often when the realities of your budget are staring you in the face, you turn toward the left and start hacking away at expenses (come on guys, let’s be realistic, you will need to buy clothes eventually) until you’re left sitting at home watching re-runs of Silver Spoons, analyzing the poor spending habits of Edward Stratton III — and it’s Friday night.
Let’s turn to the right and focus on increasing your means.
This glance right happened to me during the summer of 2004. As a result, I decided I’d sell mine and Julie’s budgeting system to the world. Hopefully the story has a happy ending.
There’s a relationship, honestly, between the amount of income, both in the short- and long-term, and the upfront time required to make things happen. I slaved away at the keyboard to create the following professionally-designed-publish-quality visual representation:
You can see that a large upfront investment of time may do very little for income now, but can have a huge impact on future income. Examples may include furthering your education, networking, building your career or starting a side business.
A small upfront time investment can yield a significant short-term increase to your means, but does not have the cumulative power of long-term investing in other income sources (which is why the Future line’s area is filled). Examples of short-term bursts to your means may include selling stuff, working overtime, or picking up odd jobs.
FMF over at FreeMoneyFinance has a phenomenal list of ways to increase your means in his Guide to Making Money. My two favorites include:
Oh and, let’s not forget the best way to increase your means: Invest and eventually live off the earnings.
Being frugal is all well and good, and I enjoy the Frugal Fight as much as the next guy, but I suppose I enjoy the task of increasing my means even more. After all, there’s a lot more to life than Silver Spoons.
This is The Wallet. My name is Jesse Mecham, founder of YNAB. Here I focus on the YNAB methodology, software, personal finance, and more.
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